Agora Financial’s Rude Awakening

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• The widening spread between merit and reward on Wall Street,
• The big 5 chalk up records for losses…and bonuses,
• And, a Happy Thanksgiving to ALL readers

Eric Fry, reporting from Laguna Beach, California… Your editors here at the Rude Awakening would like to wish a very Happy Thanksgiving to all of our faithful readers (and also to all of our unfaithful readers).This is the time of year when we count our blessings…and, as always, some of us have many more blessings to count than others, especially if we are healthy, have a few shekels stashed under our mattress and cohabitate with individuals who brush their teeth twice a day.Over in the financial markets, 2007 has not been a kind year. But it could have been much worse. The major averages still cling to small gains for the year. We can be grateful for that. We can also be grateful that Fannie Mae and Freddie Mac lost only 25% of their combined market values on Tuesday, rather than 100%. Most of all, we can be grateful that America’s multi-billion-dollar writedowns on mortgage-backed securities are so mind-numbingly large that no one really understands their seriousness.

The “hard money” folks among us might also be grateful for the soaring prices of gold, silver and most other commodities, while even short-sellers have cause for gratitude. They can be thankful for the demise of the American housing market and the destruction of the American financial system.

But nobody in American should be more grateful this year than the recipients of Wall Street record-setting bonuses. Who could have known that one of the worst years on record for America’s financial institutions would have yielded a record-setting bonus pool for the employees of those same financial institutions?

Maybe – we’re going out on a limb now – the bonuses should have DECREASED. Maybe the crippled financial institutions who are doling out million-dollar checks to their top brass could have found better uses for their scarce cash.

But what do we know; we’ve never lost billions of dollars on behalf of public shareholders. Maybe it’s harder than it looks…

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How Much is $38 Billion?
by Eric J. Fry

Business on Wall Street has never been better! Oh sure, earnings have tumbled, entire divisions have disappeared and tens of billions of dollars of shareholder wealth have vanished from the balance sheets of leading lending institutions. Nevertheless, bonuses at the five largest Wall Street firms jumped 9% above last year’s record-setting tally.

“Never in the history of Wall Street have so many earned so much in so little time,” a Newsday columnist remarked one year ago. The columnist was referring to the then-record $36 billion in year-end bonuses that Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns dispensed to its employees at the end of 2006.

Last year’s record payout seemed audacious, but not quite outrageous. By contrast, Wall Street’s 2007-vintage bonus pool is both audacious AND outrageous, as well as disgusting, reprehensible, over-the-top and rapacious.

This year, Wall Street’s five largest brokerage firms will dole out a new-record $38 billion in year-end bonuses. The hefty number would seem merely audacious if Wall Street’s shareholders were sharing the wealth. But they are not. “Shareholders in the securities industry are having their worst year since 2002,” Bloomberg News observes, “losing $74 billion of their equity.”

Just think how large the bonuses would have been if every Wall Street firm had gone completely bankrupt…or at least as bankrupt as Wall Street’s ethics.During 2006, the stock market climbed and Wall Street flourished. So the then-record bonuses possessed at least some tenuous connection to legitimacy. But in 2007, what rational could possibly exist for establishing a new-record payout?

Maybe just this: because they can get away with it. We would note, for example, that sanctions imposed by the Securities and Exchange Commission in fiscal 2007 fell to the lowest level since 2002. The SEC collected only $1.6 billion in fines this year, compared with more than $3 billion in each of the previous three years. Perhaps no direct connection exists between soaring Wall Street bonuses and shrinking SEC penalties, but a symbolic connection certainly exists.

Wall Streeters already believe that “what’s yours is theirs;” it’s in their professional DNA. So if the SEC turns a blind eye to the processes that promote institutionalized avarice, who else could possibly stand in the path, other than a few grumpy, ill-mannered journalists? The large bonuses would not be so galling if they tended to go up as well as down. But they don’t. The connection between merit and pay disappeared a long time ago. As recently as ten years ago, the bonus pool for New York City’s finance-company employees totaled less than 90% of the net income of NYSE brokerage firms. Today, the relative size of the bonus pool has doubled to about 180% of net income.

To put it kindly, Wall Street bonuses possess a distinct upward bias. In fact, Bloomberg notes, “The last time bonuses declined was 2002 when the Standard & Poor’s 500 Index fell 23 percent, and Enron Corp. and WorldCom Inc. went bankrupt.” But these financial hiccups from 2002 seem relatively tame alongside today’s epic credit-market devastation. Tens of billions of dollars are disappearing from the balance sheets of America’s largest lending institutions. Tens of billions more might disappear before the bust has run its course. In this context, dispensing tens of billions to millionaire-employees seems imprudent, if not utterly asinine. But then, lest we forget, Wall Street is forever and always about money – both making it and taking it.

Let’s try to put this year’s bonuses in perspective by having some fun with numbers.

Just for kicks, let’s ask ourselves, “How much is $38 billion?”

Well, for starters, it is more money than Wall Street’s five largest brokerage firms – combined – earned during the last 12 months. $38 billion is also more than the combined earnings of these five firms during all of 2004 AND 2005.

It is more than the annual GDP of Guatemala or Costa Rica. It is seven times more than the annual budget of the National Cancer Institute (NCI), America’s principal agency for cancer research.

Looking beyond our own shores, $38 billion is three times more money than the entire world spent on humanitarian aid last year. $38 billion is twice the sum necessary to provide basic health care to every child in the world, and three times the sum necessary to provide clean drinking water to every child in the world.

$38 billion does pale alongside some annual expenditures, however. It pales alongside the $59 billion the world spends on golf every year, or the $118 billion it spends on wine (I’m guilty). And in particular, $38 billion pales alongside the $794 billion the world spends waging war or preparing to wage war.

“Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed,” President Dwight Eisenhower once remarked. “The world in arms is not spending money alone. It is spending the sweat of its labourers, the genius of its scientists, the hopes of its children…this is not a way of life at all in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of fire.”

Admittedly, excessive compensation regimes that bear no legitimate connection to merit are not as costly to humanity as warfare, but these regimes nevertheless impose serious covert costs. They “steal” money from shareholders, cultivate a risk-taking, “lottery” mentality among financial firms and sanitize unbridled avarice as “merit-based pay.” Excessive compensation schemes also help to legitimize extreme socio-economic disparities. As such, these schemes work to squander the nation’s collective “sweat,” “genius,” and “hopes”…just like warfare.

The stewards of public companies do not deserve mega-million bonuses. Not once, not twice, not ever. They are the EMPLOYEES of public companies that are OWNED by the shareholders. They are not the lords of their domain with the right to tax the productivity of the shareholder/serfs. The era of the overpaid corporate stewards is corrupting and crippling American dynamism.

Obviously, most employees within the Wall Street rank and file deserve every cent of their year-end bonuses. But most of those at the top of the ranks do not. So maybe $28 billion would have done the trick, saving $10 billion for – oh, I dunno, boosting shareholder equity against the next moronic credit debacle that America’s financial chieftains bring down upon their abused shareholders.

There’s no denying that greed and money go together – just like Ginger Rogers and Fred Astaire…or maybe more like Bonnie Parker and Clyde Barrow. So we cannot really blame Wall Street for being what it is. But we can avoid dancing on the same stage…or riding into an ambush in the same 1934 Ford V-8, so to speak.

Happy Thanksgiving!

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Rude Endnote: Your junior editor would like to formerly and publicly request that his multi-million dollar year-end bonus be paid in euros.

Enjoy the turkey!

Joel Bowman
Rude Awakening